RESTON, Va.--(BUSINESS WIRE)--Nov. 5, 2018--
The overwhelming majority of U.S.-based public companies are choosing
the less onerous – but riskier – of two possible methods for complying
with the transformative new accounting rules for recognizing revenue
from customer contracts, known as ASC 606. This according to a new
report from business and regulatory compliance analytics company, Intelligize.
The report, Impact
of Revenue Recognition Standards on Public Companies, uses
public company filings, SEC comment letters and other data from the
Intelligize research platform to examine how both companies and the SEC
have handled the adoption of the new revenue recognition standards on
public companies.

“These rules have been in development for 12 years, but, given that this
is the first complete overhaul of these standards in a decade, they are
still bringing a lot of uncertainty with them,” said Rob Peters, the
report’s lead author and a senior director at Intelligize, whose
research platform provides news, regulatory insights, and powerful
analytical tools for accounting, compliance and transactional
professionals. “Our findings suggest that for most public companies, the
advantages of taking a more cautious approach did not outweigh the
burdens they imposed.”

The new revenue recognition rules, which went into effect for public
companies on January 1, 2018, cut across all industries and have been
called the regulatory change with the most profound impact on corporate
finance since the Sarbanes-Oxley legislation at the start of the
century. Intelligize’s report found that 87 percent of S&P 500 companies
have opted to use the “modified retrospective transition” method for
complying with the new rules, rather than the “full retrospective
transition” method, which requires companies to restate revenues back to
fiscal year 2016.

The modified retrospective method does not require companies to recast
past revenue and is widely thought to require less effort. By offering
less historical context, however, this method increases the risk that
the market will misinterpret reductions in revenue numbers caused by the
accounting change. The aversion among S&P 500 companies to the rigors of
the “full retrospective” method is consistent with another finding from
the report: fewer than 32 of nearly 4,000 public companies chose to
become early adopters of the new accounting standard.

“The huge disparity in S&P 500 standard adopters electing to use the
modified transition method, while nearly half (46.9 percent) of early
adopters chose the full retrospective method, may be attributed to
several factors,” Peters said. “These may include the time cushion
afforded early adopters compared to their later adopting peers, and/or
the relative size of the S&P 500 standard adopter companies, which makes
using the full retrospective method more challenging.”

Intelligize’s report also found that to date, the SEC has been true to
its initial word in working with companies facing the challenging
transition to the new revenue recognition standard. In May 2018, Kyle
Moffatt, chief accountant for the SEC’s division of corporation finance,
noted that “We aren’t planning to beat up on companies in this first
year.”

While the SEC did issue revenue recognition-related comment letters to
nearly one-third of early adopters, covering 18 different topics, 70
percent of those were directed to the measurement of performance
obligations. Only three companies – Alphabet (NASDAQ: GOOG), Commvault
Systems (NASDAQ: CVLT) and General Dynamics (NYSE: GD) – received
multiple rounds of comments, indicating the SEC’s desire to more fully
understand the judgments and analyses used to determine their approach
to recognizing revenue in certain areas of their businesses.

The study’s other significant findings include:

While only 12.5 percent of S&P 500 companies chose the full
retrospective method, nearly half (46.9 percent) of early adopter
companies did.

Early adopter companies varied widely in both size and industry; they
included Alphabet and Ford Motor Co., as well as a number of smaller
issuers.

SEC comment letters on revenue recognition have focused on areas the
agency has cited as its main concerns—most prominently, measuring
performance obligations.

The importance of revenue recognition is reflected in the wide range
of filing areas in which companies cite them, including MD&A analysis,
risk factors, and proxy issues.

Part II of Intelligize’s revenue recognition report is scheduled to be
released during Q2 of 2019. It will explore additional insights and
considerations exposed through the public reporting and ensuing SEC
review process, including but not limited to:

The latest changes and guidance in key areas associated with the new
revenue recognition update

The impact of the new standard on reporting issuers

Assessment of the SEC’s disposition as it relates to the first wave of
revenue recognition reporting

About Intelligize

Intelligize is the leading provider of best-in-class content, exclusive
news collections, regulatory insights, and powerful analytical tools for
compliance and transactional professionals. Intelligize offers a
web-based research platform that ensures law firms, accounting firms,
corporations and other organizations stay compliant with government
regulations, build stronger deals and agreements, and deliver value to
their shareholders and clients. Headquartered in the Washington, DC
metro area, Intelligize serves Fortune 500 companies, including
Starbucks, IBM, Microsoft, Verizon and Walmart, as well as many of the
top global law and accounting firms. In 2016, Intelligize became a
wholly-owned subsidiary of LexisNexis®, a leading global provider of
content-enabled workflow solutions designed specifically for
professionals in the legal, risk management, corporate, government, law
enforcement, accounting and academic markets. For more information,
visit www.intelligize.com.